Dictionary / Trading and orders
What Is a Call Option?
A call option gives you the right, but not the duty, to buy a stock at a set price before a set date. People buy calls when they think a stock will go up.
A simple example
A stock costs $100. You pay $5 for a call option to buy it at $110 within three months. If the stock rises to $130, you can buy at $110, a $20 gain per share, minus the $5 you paid: $15 profit. If it stays below $110, the option expires worthless and you lose the $5.
Key words
- Strike price: the price you can buy at ($110 above).
- Premium: what you pay for the option ($5).
- Expiration date: when the right ends.
- Contract: in the US, one contract usually covers 100 shares.
Why options are risky
Most options expire worthless. Time works against you: every day, an option loses some value. Because they are cheap, they can tempt people into big bets. The opposite of a call is a put option.
See it in real companies
Open a company to see what it sells and how it makes money.